There are all kinds of articles online about how to get approved for a mortgage, but in spite of that free advice, 8 to 18% of applicants do not get approved. How do you ensure you're not one of the rejects? If you want your dream home, it's time to dig a little deeper and see what loan officers are really looking for.
Right off the bat, most loan officers are going to look at your credit score. Generated by FICO, the score is a numerical representation of your creditworthiness. It takes into account your total debt, liens, judgments, and bills in collections, but it also includes data related to the timeliness of loan repayments and the amount owed compared to the limits on your credit lines.
The median FICO score for most consumers is 723, and if your score is higher than that, you're ahead of the game. Generally, loan officers want to see a score of at least 680. That said, if you've got some of the elements below in place, they may be willing to work with scores in the high 500s or low 600s.
Clearly, you need to be able to afford the house, and if your income doesn't back that up, you won't get approved. As a general rule of thumb, you should be in your current role for at least two years, but if you've just started a job, lenders measure your income stability by how long you've been in the industry.
A lifelong career or at least five years’ experience is much better than being new to the field. All of these expectations are much higher if you work for yourself. To put it in simple terms, the bank is embarking on a long term relationship with you, and it wants to ensure you're as stable as possible.
In addition to looking at your income on its own, loan officers want to see how your income compares to your debt. There are front end and back end ratios that most lenders take into account. The front end ratio is simply your mortgage divided by your gross income. For instance, if the mortgage payment is $1,000 and your income before taxes is $5,000, your ratio is 20%. That is low and favorable. Generally, lenders want to see anything lower than 28% for this number
The second debt-to-income ratio is actually more important. Called the back end ratio, it compares the total of your mortgage, all other debts, and your tax payments to your gross income. While lenders used to work with buyers who had a back end ratio of up to 50%, the target is now less than 43%.
Whether or not you have a down payment also affects your likelihood of getting approved. A 20% down payment is the sweet spot, but that can be hard to manage. Luckily, loans guaranteed by the Federal Housing Administration (FHA) or the Department of Veteran's Affairs (VA) generally only require a down payment of 3%.
This is another key ratio that loan officers take into account and the lower the ratio, the better. If you're taking out a loan for $300,000 and the home is appraised at $400,000, the loan-to-value ratio is 300/400 or 75%. In most cases, your down payment has the biggest impact on this ratio, but it can also come into play in situations where you're buying a home for less than its market value.
The loan officer may also take into account the home's likelihood of holding its value. If home values in the neighborhood are spiraling downward, you may get a big fat "no" on your application. To put it in simple terms, the bank doesn't want you to owe $200,000 on a property that's only worth $100,000. While this part of the equation is a bit out of your control, it underscores the importance of choosing your location carefully.
On one hand, shopping around is essential if you want to find the best deal, but on the other hand, every time you apply for a loan, the lender pulls your credit report. Those "hard inquiries" ding your credit score, and they can drive down your chances of getting approved.
Try to find out as much as possible about a bank's lending practices and available rates before putting in an application, or apply with an online service that can run a single application past multiple lenders.
The more liquid assets you have, the less risky you are. If you've got savings, bonds or other easy-to-liquidate assets, the loan officer will feel more assured that you can make the monthly payments. That can also help improve your success rates.
Typically, you have to provide a few months of bank records to the loan officer. The officer wants to see that you are managing your accounts responsibly. Lots of overdrafts or insufficient funds fees can hurt your chances. If you have the down payment in that account, it looks better if you've saved that amount over time or had it for a while, rather than having just deposited the funds from an unknown source.
Ten years ago, almost anyone could get an income-stated loan. That's where the bank takes your word for how much you make. However, after the bubble burst and the feds started to crack down on mortgage lenders, this practice swiftly met its demise.
Now, you almost always have to show tax records as a form of income verification. If you're self-employed, keep in mind that the lender will look at your income after expenses. In the two or three years before applying, make sure that you don't overstate your business expenses in a way that makes your income look too low on paper.
Are you a bit lackluster in any of the above categories? Then, it may be time to get assistance from someone else. A quality cosigner can help boost your chances of approval. Ideally, the cosigner needs to have all of the above elements in place: high credit score, stable income, lots of liquid assets, and bank and tax records to back it all up.
Keep these ten elements in mind if you want to increase your chances of getting approved for a mortgage. You may even want to set aside some time in the months or years before you apply to strengthen some of these areas. Remember, the stronger your performance in these key areas, the more likely you are to get that much desired "yes" on your application.